Systematic Withdrawals: how do you decide what to sell?

[clifp]

Quote:

Originally Posted by BBQ-Nut I get the concept of taking dividends, esp from tax deferred portfolios, and distributing them to one's liquid account to dispense out for expenses, but my question had to do with specifically, about 'redeeming "some fund" and buying "others" to get the desire AA'. What funds are people selling when they must sell off to meet expenses? Are you selling your fixed income funds? Or your equities? What criteria do you use to decide which specific funds to sell off? Using equal across the board distributions to keep your overall AA the same sounds reasonable, but I've read that in down markets if you sell of your equities you are hurting your chances for rebounding - so using a 'rule of thumb' of equal portions may not be the most sound. Just trying to get a flavor for how folks make the specific choices.

Realistically you aren't going any two people with the same withdrawal process.

The various studies and calculators assume this process.
$1,000,000
50/50 stocks/bonds
Stocks up 12% = $550,000
Bonds up 2.2% = $511,000
Total = 1,060,000
Inflation 2.5%
Withdrawal $41,000
Sell $40,000 from your one stock fund
Sell $1,000 from your one bond fund
Start 2015 with $510K in stocks and bonds.

AFAIK no actual retiree has just one stock and one bond fund and increase their withdrawal rate by inflation.

I have a set amount amount that is moved from brokerage account to my checking account each month, plus rental income. But for major purchases and I've made a lot in the last year, I do a combination of selling over valued stocks and also tax harvesting.

There are also multiple ways to rebalanced. Annual is popular method. as is using bands International 20-25% US 40-45% Bonds 30-40% whenever an asset class exceeds its upper bounds you sell it and use the proceeds to fund your withdrawal needs and if there is some left over but the asset class near the lower end of their boundaries.

The problem of course is it is not always possible to know what is a down market or up market for a few years.

The good news is that any of these schemes will generally result in you selling stocks when they are expensive and buying them when they are cheap (on relative basis to bonds).

I wouldn't sweat it too much all of these scheme work. Although I'd certainly read the threads on tax efficiency and such.

[pb4uski]

Quote:

Originally Posted by BBQ-Nut I get the concept of taking dividends, esp from tax deferred portfolios, and distributing them to one's liquid account to dispense out for expenses, but my question had to do with specifically, about 'redeeming "some fund" and buying "others" to get the desire AA'. What funds are people selling when they must sell off to meet expenses? Are you selling your fixed income funds? Or your equities? What criteria do you use to decide which specific funds to sell off? Using equal across the board distributions to keep your overall AA the same sounds reasonable, but I've read that in down markets if you sell of your equities you are hurting your chances for rebounding - so using a 'rule of thumb' of equal portions may not be the most sound. Just trying to get a flavor for how folks make the specific choices.

I don't take any dividends from my tax-deferred accounts, only from taxable accounts. Since dividends from taxable accounts will be taxed anyway it seems silly to reinvest them and have to wait a year to sell the shares to get tax favored treatment. Those dividends are paid to my credit union account and are spent.

Since we are under 59 1/2, we sell taxable funds when we rebalance and top up our cash position which funds our living expenses, then we rebalance fixed income and equities entirely within our tax-deferred accounts, selling equities and buying bonds or vice versa, as is necessary to get the whole back to our target AA.

If our living expenses were coming from tax deferred accounts, I would continue to reinvest dividends and do one of two things. One, do an annual distribution from tax-deferred accounts of the amount needed for living expenses and let it sit in online savings and then be auto transferred to our credit union monthly. Or two, have monthly auto withdrawals proportionally from the two main stock and bond funds in my tax-deferred account and then rebalance annually as necessary. I would probably lean to the former as it seems more simple to me but I can tell you for sure in 12 years.

Since sales in tax deferred accounts have no tax implications, it isn't necessary to fret over what positions to sell other than possible AA implications, however in most cases between reinvested dividends and market movements and sales there are many moving parts so I wouldn't fret over that other than just monitoring AA to make sure if doesn't vary too much from target.

[explanade]

Can you post the spreadsheet without your specific numbers but the formulas intact?

[BBQ-Nut]

Quote:

Originally Posted by mathjak107 putting taxes aside as i already voiced my opinion about hitting the ira accounts first to get that nice low tax rate what assets you sell is really only crucial the first 5 years. the first five years are very dangerous to a retirement so the one thing you do not want to count on spending from in a down market is equities. after a good run up whether you use a systematic whithdrawal or a bucket system it really didn't matter. as long as you have a good up cycle before a down turn you can pull from any where you like and still get similiar results. even spending from 100% equities directly in good and bad times did not make much difference.

Ok, but what funds are you 'hitting' in your ira?

A select few, all, by sector, by asset class?

[BBQ-Nut]

I guess I'm not wording my question very well.

I am not asking about what methodology folks use for their drawdown, but what specific funds you decide to sell as part of your systematic withdrawals.

How do you decide to draw on your bond fund vs an overseas or emerging market, a small cap or your index ETF?

Or does everyone do equal portions across all their funds to preserve your desired AA?

[MichaelB]

All of our fund distributions are taken in cash, not reinvested, and are the primary source of new budget funding. When we have needed to cash from the portfolio we use a bond fund, then decide if we want to rebalance the portfolio.

A prerequisite for this is to have an asset allocation target.

[pb4uski]

Quote:

Originally Posted by BBQ-Nut I guess I'm not wording my question very well. I am not asking about what methodology folks use for their drawdown, but what specific funds you decide to sell as part of your systematic withdrawals. How do you decide to draw on your bond fund vs an overseas or emerging market, a small cap or your index ETF? Or does everyone do equal portions across all their funds to preserve your desired AA?

Drawdowns will only marginally affect your AA. My IRA is where we rebalance things so it has 5 different asset classes within it, but two (emerging markets equities and fixed income) are pretty small. If I were drawing down from that account I would probably just do automatic redemptions to the two largest asset classes (domestic equities and domestic investment grade bonds) proportionally and then sort out the rest of it when I did my annual rebalancing.

I look at my AA compared to target monthly anyway (takes about 2 minutes as I have it set up) so if my overall AA started to stray more than I want I could simply adjust the automatic redemptions as needed.

WADR, I think you might be overcooking your redemption strategy, it doesn't need to be that complicated.

[target2019]

Quote:

Originally Posted by BBQ-Nut I guess I'm not wording my question very well. I am not asking about what methodology folks use for their drawdown, but what specific funds you decide to sell as part of your systematic withdrawals. How do you decide to draw on your bond fund vs an overseas or emerging market, a small cap or your index ETF? Or does everyone do equal portions across all their funds to preserve your desired AA?

What I say is hypothetical, but at whatever time necessary, I'd look at my asset allocation. Is something out of band? We have 20 funds, and I automatically calculate a dollar amount and percentage out of target. If I was retired, I would take x from the fund(s) which would get me back to target. In the same spreadsheet I have what-if columns, and can manually enter the dollar amount to be withdrawn, and view its impact on AA. This is useful to us, as there are five investment spaces, and international components are in 3-4 spaces.

The short answer: we have a spreadsheet! I started this so that I could look ahead to end of year and see what impact certain contributions have on the ending AA.

[Alan]

I take dividends from taxable accounts, some of which are qualified and taxed at 15%.

I have a couch potato selection of 4 Vanguard index ETFs and I'll sell some from those funds while maintaining my AA of that group. I have Wellington and Wellesley in my IRAs so I will exchange between them to maintain their AA, but I am not drawing down from them yet.

I will also do some tIRA to ROTH conversions using my IBonds to pay the taxes due on the conversion.

My target AA is 50/50 for both my after tax and IRA accounts and a simple spreadsheet suffices to see where I stand since I only have 4 funds in my taxable, and 2 funds in my IRA funds.

[audreyh1]

Quote:

Originally Posted by BBQ-Nut I guess I'm not wording my question very well. I am not asking about what methodology folks use for their drawdown, but what specific funds you decide to sell as part of your systematic withdrawals. How do you decide to draw on your bond fund vs an overseas or emerging market, a small cap or your index ETF? Or does everyone do equal portions across all their funds to preserve your desired AA?

Preserve AA. If you do the withdrawal right, you end up rebalanced to your target AA.

[Alan]

Quote:

Originally Posted by BBQ-Nut I guess I'm not wording my question very well. I am not asking about what methodology folks use for their drawdown, but what specific funds you decide to sell as part of your systematic withdrawals. How do you decide to draw on your bond fund vs an overseas or emerging market, a small cap or your index ETF? Or does everyone do equal portions across all their funds to preserve your desired AA?

Here is a simple spreadsheet covering 4 funds plus the sweep money market fund. Quite easy to see which funds are over/under their target AA when making contributions or withdrawals.

[Animorph]

Quote:

Originally Posted by audreyh1 Preserve AA. If you do the withdrawal right, you end up rebalanced to your target AA.

+1. Your AA is there for a reason.

However, if the market is down 20% I would then sell only bond funds (and reinvest equity dividends) until it recovered to something above -20%. Of course if the market is down, your AA rebalancing may require something leaning towards that anyway.

I myself am nominally 100% equities, with sometimes a cash buffer. If I have any cash it is used for expenses until gone, then I start taking dividends and selling equity shares. My AA specifies the percent allocation of each equity fund in the portfolio. When I sell to raise cash, it is simply a rebalancing exercise. Anything else is market timing.

[BBQ-Nut]

Lot's of good info - thank you everyone for sharing - I have lot's of more reading to do...but, I still have more questions. Stay tuned!

[donheff]

Quote:

Originally Posted by BBQ-Nut I guess I'm not wording my question very well. I am not asking about what methodology folks use for their drawdown, but what specific funds you decide to sell as part of your systematic withdrawals. How do you decide to draw on your bond fund vs an overseas or emerging market, a small cap or your index ETF? Or does everyone do equal portions across all their funds to preserve your desired AA?

I think you need to follow the first suggestion and read a variety of threads on this topic so you get a good feel for the pros and cons of various approaches and then decide in the context of your circumstances. The default concept is that you withdraw from funds that have done the best naturally leading toward a return to your desired AA. In cases of broad downturns this can be difficult to deal with. Some of us keep cash or cash like reserves that we hope to turn to to avoid depleting equities (or even bond funds) while they are depressed. Some of us (generally with high enough pension income to move us past the 15% bracket) pull only from funds in taxable accounts while we can, rebalancing in the tax differed. Some (not me, mainly engineers) have this down to a science. Others (including me) operate on a bit of a wing and prayer. I figure a good DFA advisor could probably save me a few bucks by more rigorously monitoring how I go about withdrawals but not enough to pay back the fees. Anybody who thinks differently, I CAN'T HEAR YOU.